Financial contagion between the US and selected developed and emerging countries: The case of the subprime crisis

• We investigate the contagion between the US stock market and a sample of selected developed and emerging stock markets.
• We find evidence of contagion between the US stock market and developed as well as emerging stock markets.
• The Lehman Brothers’ collapse was transmitted in a remarkably similar fashion across developed and emerging markets alike.
• There is evidence of short-term linkages between US stock market and other developed and emerging stock markets.

This paper assesses the contagion between the US equity market and selected developed and emerging stock markets over the period from January 3, 2005 to January 21, 2014 with a particular focus on the contagion risk caused by the subprime crisis of September 2008. The analysis opts for the methodologies of Sander and Kleimeir (2003, Journal of International Financial Markets, Institutions and Money, 13, 171) and Ramlall (2009, International Research Journal of Finance and Economics, 30, 30) based on cointegration techniques and Granger causality tests. It is complemented by examining the impulse response functions and variance decomposition to measure the response time of the financial markets considered to a shock on the US stock market. The study is conducted over both the pre- and post-subprime crisis periods and provides significant evidence of contagion effects between the US stock market and the developed and emerging equity markets after the global financial crisis.